The Goldman Sachs Group, Inc. (GS) Earnings Call Transcript & Summary

Good morning. My name is Dennis, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs Fixed Income Investor Conference call. This call is being recorded today, Thursday, December 3, 2020. Thank you. Ms. Miner, you may begin your conference.

Good morning. This is Heather Kennedy Miner, Head of Investor Relations at Goldman Sachs. Welcome to our fixed income investor conference call. We have posted presentation materials on the Investor Relations portion of our website at www.gs.com. Please see our cautionary note on forward-looking statements, which can be found on Slide 22. This audio cast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Today, on the call, our Chief Risk Officer, Brian Lee, will review the firm's financial positioning, strategic priorities and risk management in the context of the current environment. Our Global Treasurer, Beth Hammack, will then provide an update on funding, liquidity, capital and our LIBOR transition efforts. Following the prepared remarks, Brian and Beth will be happy to take your questions. Brian?

Thanks, Heather, and thanks to everyone for joining us this morning. I hope you, your family and friends remain healthy amid the continuing challenges with COVID-19. Let's turn to Slide 1 to discuss year-to-date performance and the financial position of the firm. We posted our highest year-to-date revenue since 2009. And in the third quarter, we reported record quarterly EPS. We have more than doubled the firm's equity base since 2007, resulting in more than a 50% reduction in our gross leverage. From a liquidity perspective, our global core liquid assets, or GCLA, averaged over $300 billion during the third quarter, representing 26% of our balance sheet and a fourfold increase compared to 2007. Our standardized CET1 ratio stands at 14.5%, well ahead of our current capital requirements. We significantly improved this ratio over the last 2 quarters, helped by strong earnings generation and active balance sheet management. Taken together, we not only went into this crisis with a significantly improved risk profile compared to 2008, but we have further strengthened our financial profile this year. Broadly, we continue to navigate an evolving backdrop brought on by COVID-19. And while we are encouraged by recent signs of progress regarding a vaccine, the ultimate trajectory of the virus and economic recovery is uncertain. However, during this time, we have remained focused on serving clients and executing our strategic priorities. Throughout our history, clients have come to Goldman Sachs during times of market volatility and uncertainty for advice, financing, thought leadership and risk intermediation. And this time has been no different. We are committed to prudently deploying the firm's resources to serve the needs of our clients while maintaining a keen eye towards risk management. Let's turn to Slide 2. I want to spend a moment on our historical performance, particularly with a lens towards the relative stability of our earnings. Though our firm-wide revenue volatility has historically been in line with our peer set, our earnings volatility has persisted in being much lower than that of the group, a key credit positive for our franchise. This has been driven by the dynamic management of both compensation and non-compensation expenses. And as we execute on our strategy, our ongoing shift to more durable fee-based revenues should continue to drive low earnings volatility. On Slide 3, let's spend a few minutes revisiting the pillars of our strategy we laid out at Investor Day. While 2020 has been meaningfully different than what we expected, our experience only reinforces our strategic priorities. We remain committed to strengthening our core businesses and expanding into new and adjacent businesses while operating with greater efficiency. It's important to emphasize that the execution of our strategic plan is underpinned by our deep-rooted culture of risk management. Ultimately, these strategic initiatives represent significant credit positives. First, we are increasing the diversification of our businesses via more traditional bank activities, leading to a more stable revenue profile and more durable earnings over time. Second, we are strengthening our client franchise by offering value-added products and services such as transaction banking, enhancing deep and long-standing corporate and institutional relationships in the context of our One Goldman Sachs initiative. Third, we are diversifying our funding profile by increasing the relative proportion of more stable deposits compared to wholesale funding while moving more assets into bank entities that can be funded with these deposits. And fourth, we are optimizing capital utilization across the firm, including reducing the capital deployed in our invested management investing activities. Turning to Slide 4. As I referred to earlier, our risk management foundation underlies all parts of our long-term strategy as we prioritize effective, independent and empowered control functions. It also gives us confidence in our ability to continue to successfully navigate periods of uncertainty and market volatility. This foundation has been built through years of dedication and focus and is supported by our substantial risk culture, robust processes and commitment to continuous improvement. Our risk management culture is differentiated by our disciplined risk reward approach and is reinforced by our deep bench of talent. Our firm manages all dimensions of risk, including market, credit, liquidity, operational and technology risk, and leverages analytics and engineering capabilities. From a process perspective, we employ comprehensive limit structures, stress testing and rigorous approvals. This is bolstered by our long-standing mark-to-market discipline, which provides helpful transparency to both our business leaders and risk managers. And we remain committed to the continuous improvement of our processes, incorporating learnings from our experience, managing through the volatile and dynamic environment brought on by COVID-19. Turning to Slide 5. Let's spend some time reviewing how we dynamically manage risk during the period of the volatility brought on by the COVID-19 crisis and what we're focused on now. It's important to note that in managing through this environment, drawing on our experience from weathering prior crises was invaluable with a substantial governance processes and controls implemented over many years proving critical in March and April, in particular. We were laser-focused on operational resilience as we entered the COVID-19 crisis. And as a first step, we quickly transitioned to approximately 98% of our people working remotely. We successfully navigated elevated levels of sales, widening basis risk and margin mismatches, bringing our risk and operations teams together to address these systemic developments, all the while managing our technology and firm-wide platforms from remote locations. Compliance made adjustments to facilitate surveillance. Engineering guarded against the risk of increased cyber threats. And financial risk exposures and limits were dynamically managed to ensure continuity and control. In the current environment, we continue to focus on further leveraging technology to serve clients and enhance connectivity as well as helping our people return to the office safely where appropriate. Turning briefly to liquidity and capital. Like many market participants in March and April, we experienced volatility and liquidity from increased industry-wide operational friction amid heightened settlement volumes as well as higher corporate revolver draws. However, given we came into the crisis with levels of liquidity and capital designed to absorb severe stress, we were able to support our clients by extending balance sheet and acting as a market maker when they needed it most. Although the depths of the financial crisis have receded, we are still operating with a substantial liquidity buffer, as evidenced by our greater than $300 billion GCLA pool. We managed market and credit risk holistically during this period as we prudently monitored positions and directional risk. Our dialogues with clients during this crisis were different versus 2008 crisis as we applied the One Goldman Sachs client-centric approach outlined in our strategy. While in certain instances, we closed out trades where necessary, our clear stance was to be supportive of clients through the volatility. In addition to driving better risk outcomes, this approach was positive from a franchise perspective and was supportive of our market share gains this year. On an ongoing basis, we continue to run stress tests, rigorously manage focused risks and carefully monitor risk capacity and limits. As I alluded to earlier, diligent risk standards implemented prior to the crisis were key. Our long history of a conservative bias drove prudent underwriting standards, structuring and collateralization. Additionally, active client dialogue helped us manage risk across clients where we saw the greatest initial impact of the crisis, including hedge funds and other nonbank financial institutions. We successfully managed through several high-focused distressed cases across a total of 45,000 regulated funds and 5,000 hedge funds. While counterparty concerns dominated much of the initial stress period, the ongoing impact of COVID-19 on credit risk is a key focus for us and the industry. Our exposures remain tangible, particularly in sectors impacted by pandemic, which I will go into further detail on shortly. On the consumer side, we tightened our credit policy and slowed origination volumes while staying focused on assisting existing customers. On the forward, we'll continue to monitor trends. But given the increase in our reserve build this year, we believe we are appropriately reserved for potential losses and charge-offs. Let me spend some more time on credit risk as it relates to our loan portfolio on Slide 6. At the end of the third quarter, we had $112 billion of net funded loans. Nearly half of our book is comprised of corporate lending, which includes funded relationship loans, direct and opportunistic loans within asset management and financings within global markets that are largely collateralized. Over 1/4 relates to wealth management loans that are extended to private bank clients. 20% is related to our real estate lending activity. And the remainder is comprised of consumer and other loans. Given the institutional nature of our lending, 81% of our total loans are secured, which provides significant protection in the event of financial stress or a market downturn. At quarter end, our allowance for loan losses totaled $3.7 billion or 3.7% of total gross loans under accrual accounting. More specifically, the allowance was 2.8% for wholesale loans and 16.1% for consumer loans. Broadly, while we remain attentive to the embedded risk, we are pleased with the credit performance of these portfolios with our year-to-date annualized net charge-off rate at 1%. Taking a closer look at selected credit risk exposures on Slide 7. At quarter end, we had a $52 billion funded corporate loan portfolio of which over 75% is secured, with the majority of the remainder to large investment-grade borrowers. Certain industries remain in focus in light of the ongoing pandemic, including oil and gas, gaming and lodging and airline sectors. Our total funded exposure to these sectors is roughly $7 billion. Additionally, a significant portion of these loans are secured by hard assets, where we would expect recovery rates to be manageable. Regarding our commercial real estate lending exposure, as of quarter end, we had $18 billion of funded exposure to CRE, which is primarily concentrated in North America. The portfolio is also highly diversified by property type and include $6.5 billion of exposure in the form of conservatively structured warehouse lending with typical LTVs of approximately 50%. Let's turn to Slide 8 to review our asset management balance sheet. Though assets within this segment represent less than 10% of our balance sheet, we are highly focused on this portfolio. As it relates to our private equity investments, our portfolio is rigorously evaluated to ensure that it reflects the illiquidity and risk inherent in each investment. As a result, our portfolio is appropriately marked at any given point in time. Similarly, we extend loans and invest in debt securities across the capital stack, where we employ active portfolio management. Starting with our equity portfolio. As of the third quarter, we had $3 billion of public equity, $16 billion in private equity and an additional $21 billion of consolidated investment entities primarily related to real estate, of which $12 billion are predominantly financed by nonrecourse debt. Our equity portfolio is diversified across geography and vintage, representing investments across a broad range of sectors. We are actively monitoring our portfolio and are availing ourselves of harvesting opportunities as appropriate with special focus on the tall trees that have outsized impacts on balance sheet, RWAs and capital. This includes, for example, the close of a partial sale of Taikang in 3Q '20 and the agreed sale of Global Atlantic, which we expect to close in early 2021. As previously stated, we have sold or announced the sale of roughly $4 billion of gross equity investments year-to-date with roughly $2 billion of associated capital savings. Consistent with the strategy articulated at Investor Day, we remain focused on third-party capital-raising and optimizing capital consumption of the portfolio over the long term. Our debt portfolio consists -- total $31 billion at the end of the third quarter, consisting of $14 billion of fair value debt securities, $17 billion of corporate real estate and other loans, of which $4 billion are held at fair value. This portfolio is also diversified by geography and sector and has generated solid contributions to firm-wide performance over many years. With respect to the loans, while a majority of the portfolio is non-investment grade, it is nonetheless well structured and 88% is secured. With that, I will now turn it over to Beth.

Thanks, Brian. I'll start by covering interest rate risk on Slide 9. Net interest income represents a smaller portion of our overall revenue base at 10% for the year-to-date versus roughly 50% for our U.S. commercial banking peers. This makes us relatively less exposed to interest rate risk, though growing NII continues to be part of our long-term strategy. As such, we are actively managing our rate risk with a holistic approach to asset liability management and are keenly focused on how to best position the firm in an economic scenario where rates remain low for some time. As it stands today, our balance sheet remains modestly asset-sensitive. The vast majority of our loans are floating rate or hedged to floating rates and our trading assets are high turnover and primarily funded by liabilities that have been hedged to floating rates. Even if interest rates stay at current levels, we expect our NII to gradually expand over time as consumer and transaction banking deposits continue to reprice. In addition, should the curve steepen through the recovery, we expect NII to increase, driven by our lending and retail deposit growth. Let's move to Slide 10 to discuss our balance sheet. Our total assets are up 14% versus 2019 to $1.1 trillion at quarter end as we supported clients in this challenging environment. Roughly 90% of our balance sheet is comprised of liquid assets, including our GCLA and assets in our trading inventory, which are generally high turnover and mark-to-market. Disciplined allocation of our financial resources is core to what we do in corporate treasury. And we continue to dynamically manage our balance sheet. Ultimately, the size and composition of our balance sheet will depend on our strategic priorities, client activity levels, the macroeconomic environment and market conditions. And as Brian highlighted, we are focused on prudently managing our risks, including market, credit and liquidity risk. Turning to the liability side. We fund our assets conservatively with a focus on term and diversification. The weighted average maturity of our secured funding remains greater than 120 days and the weighted average maturity of our long-term debt is approximately 7 years. In line with our strategy to diversify our funding mix, we are seeing a larger contribution from deposits. At the end of the third quarter, deposits comprised over 1/3 of our funding sources, a meaningful increase, given the significant inflows we've experienced this year. I'll review our funding strategy in more detail on Slide 11. As many of you may be familiar, our historical reliance on wholesale funding leaves us with a relatively higher cost of funds compared to peers. We continue to see considerable value to be unlocked here. And our strategy, as outlined at Investor Day, is based on 3 key components. First, we are diversifying our funding mix by increasing the proportion of deposits versus wholesale debt. Notwithstanding the decline in rates since the onset of the pandemic, this will improve our cost of funding over the medium term. Second, we are enhancing our asset liability management to better match our liabilities to the maturity profile of our assets. This creates an opportunity to modestly shorten the weighted average maturity of our wholesale debt. Finally, we see long-term potential to recalibrate the size and composition of our liquidity pool as our business mix evolves. As always, we will continue to be dynamic in the current operating environment while remaining committed to our strategy. Over the long term, these changes will further enhance the resiliency and efficiency of Goldman Sachs. Let's now turn to our funding channels, starting with deposits on Slide 12. We are proud of the success we've seen in growing our deposit base over the past several years. Year-to-date, our total deposits rose over $70 billion to $261 billion on the back of strong flows across our strategic channels, Marcus and transaction banking. In our consumer business, where deposits totaled $96 billion at quarter end, we experienced improved beta over the last quarter and saw total consumer deposit inflows despite recent rate reductions. We continue to expand our Marcus platform capabilities to enhance overall customer relationship. For example, in the third quarter, we launched Marcus Insights, which integrates the best of Clarity Money capabilities into the Marcus app. And we've received positive customer feedback so far. We expect this and other enhancements in 2021 to increase deposit stickiness and improve betas. In transaction banking, where deposits totaled $28 billion at quarter end, we remain focused on increasing the proportion of operational deposits. This will accelerate as clients begin to use additional services on our platform, including our payments and FX offerings. Deposits comprised 50% of our total unsecured funding base at the end of the third quarter, in line with the floor of our medium-term target set earlier this year. We are pleased with what we've achieved in our funding mix evolution. As the recent environment has helped accelerate our efforts, deposit growth will likely be more moderate in the near term in light of our entity funding needs. While our deposit growth is primarily a liability optimization strategy, we are, of course, focused on the utilization of those deposits. Historically, our business mix and legal entity structure limited the size of our banking entities, particularly in comparison to our peers. But there's an opportunity to reduce that gap. Over 95% of incremental accrual loans in 2020 were out of our bank entities. And we continue to identify opportunities to grow other businesses in the bank. These efforts have driven assets in our banks to approximately 1/4 of the firm-wide balance sheet versus roughly 15% in 2017. Turning to unsecured benchmark funding on Slide 13. Through the third quarter, we issued just over $14 billion of benchmark debt and preferred stock. All of this funding was executed in the first quarter. And a large portion of it represented an acceleration of our issuance plans to provide liquidity to our clients amid the COVID-19 crisis. Additionally, in mid-November, we opportunistically prefunded $2.5 billion of our planned 2021 issuance and executed our first benchmark transaction since the first quarter. We continue to evaluate our current and forward need for subordinated debt and preferred stock. As always, we will look for ways to optimize across our capital stack, which could include net redemptions. Let's review our additional funding sources outside of our benchmark debt on Slide 14. The largest of these channels is our structured notes program, which provides us with diversified funding opportunities across products, channels, issuing entities, currencies, tenors and investor types. Through the third quarter, we raised $53 billion from structured notes with approximately 1/3 in non-U.S. dollar currencies. These programs allow the firm to access different pockets of investors across the institutional and retail channels at attractive rates. And given our ongoing focus on diversification, we launched our GSI commercial paper program in the third quarter, which provides us with an attractive and flexible funding channel for our short-term needs. Turning to Slide 15 on liquidity risk management. As you know, we primarily manage the size and allocation of our liquidity pool based on our modeled liquidity outflow, or MLO, which assesses the firm's potential liquidity risks under a combination of very conservative market-wide and firm-specific stress scenarios. We have a long track record of prudently managing liquidity risk and are continuously refining our methodologies to reflect changes in markets and our business mix. Given our MLO is specifically tailored to our business model, it is generally more binding for the firm than regulatory LCR requirements. In the third quarter of 2020, our GCLA averaged a record $302 billion and the firm's eligible high-quality liquid assets, or HQLA, averaged $214 billion. At these levels, we are comfortably above our MLO requirements and reported an average LCR of 130% for the third quarter. Though we will continue to be conservative, we are expecting to deploy some of this excess liquidity to meet client needs, bringing us more in line with the peer average. Additionally, we recently received the finalized NSFR rule and we'll be compliant with the 100% minimum requirement once effective on July 1, 2021. Let's turn to Slide 16 on capital. As Brian mentioned, our CET1 ratio improved to 14.5% at the end of the third quarter under the standardized approach, up 120 basis points sequentially. We are confident in our capital position now 90 basis points over our 13.6% standardized capital ratio requirement. We have a demonstrated track record of prudently managing our capital. After a decline in our ratios in the first quarter as we supported clients through the depths of the COVID-19 crisis, we added 200 basis points to our standardized ratio in the subsequent 2 quarters, helped by strong earnings and our disciplined capital and balance sheet management. Looking forward, based on market movements to date and the continued strength in our equities franchise, including prime brokerage, it's likely that we end this year in the 3% G-SIB surcharge category. This is consistent with our plans as laid out at Investor Day. And we continue to believe that the 13% to 13.5% standardized CET1 target range provided at Investor Day is appropriate for our firm on a medium-term basis. While our capital ratio will likely remain elevated near term, given current regulatory restrictions on share repurchases, we expect our management buffer to decline over time, particularly as market volatility subsides. Importantly, we stand ready to commit capital and balance sheet to support our clients. And we expect to resume share repurchases once permitted, consistent with our long-standing capital management practice. On Slide 17, I want to give you an update on the upcoming LIBOR transition, which is in full swing for the market and for us at Goldman Sachs. Stephen, Brian and I have been very focused on the LIBOR transition, including recent announcements from global regulators providing significant clarity for the cessation of IBORs. Most IBOR currency tenor payer cessations are anticipated by year-end 2021. However, most tenors of U.S. dollar LIBOR are expected to continue through June 2023. With that said, there are indications of a number of supervisory guidelines between year-end '21 and June 2023 that will limit production of new LIBOR-linked products. Despite the revised timeline, this transition remains a significant undertaking for us as well as the broader industry. We will continue to be an industry leader in the transition and are committed to ensuring that it will be seamless for our clients and the firm. We've made substantial progress and are well positioned for the upcoming milestones. Our Chief LIBOR Transition Officer, in conjunction with the wider transition team, has been actively managing the process. And we continue to engage, innovate and partner with our clients, regulators and other market participants across the globe. As for our current LIBOR exposure, we have approximately $37 billion of benchmark debt outstanding and $9 billion of preferred shares, which reference U.S. dollar LIBOR. We remain supportive of the proposed legislative solutions that are being pursued in the U.S., U.K. and Europe, among other jurisdictions, to aid with the tough legacy LIBOR context in a globally coordinated manner. In addition, we are holistically evaluating our options for remediating our legacy debt and preferred stock in case they are needed. While we have meaningful exposure to LIBOR-based derivatives, we do not have as extensive a legacy book of assets linked to LIBOR compared to peers, especially in the consumer space. We continue to closely monitor the markets, and we'll look for opportunities to diversify our funding sources, utilizing alternative risk-free benchmark rates, one such example being our SOFR benchmark issuance last month. With that, let me conclude with a few comments on Slide 18. As we navigate this market environment, we remain committed to serving our clients' needs. Our strong third quarter and year-to-date results reflect the commitment of our people, diversification and strength of our client franchise, resilience of our business model and flexibility in our highly liquid balance sheet. We will maintain a conservative posture, given the uncertain trajectory of the virus and path of the recovery, to ensure we are well positioned from a liquidity and capital perspective to support our clients. As we've reiterated, we are confident in our ability to achieve our medium-term financial targets and execute our strategic priorities, including our One Goldman Sachs orientation that is driving a better client experience, more durable revenues and higher returns. Our strong culture of risk management, coupled with our robust control processes, will help us to serve our clients and successfully navigate this evolving environment. With that, Brian and I are happy to take your questions.

[Operator Instructions] Your first question is from the line of Robert Smalley with UBS.

Wanted to pick up on a point that you had made a little earlier with respect to preferred and subordinated debt. In the past, you've shied away from doing preferreds, you did a small issue this year. Is there any kind of different thinking around the preferred space? Are you looking at doing more preferreds next year? And what would those fund? And on the subordinated front, you have a number of large, longer-dated issues at a high dollar price. When you talk about optimizing that, how do you think the best way to optimize that would be from a cost-effective point of view?

Sure. Thanks for the question, Robert, and thanks for joining us. As you know, we try to be as efficient as possible with our Tier 2 capital stack. And the thing I would say that's changed most this year was that when we got the new SCB capital rule in March, we did get information that the SLR was no longer going to be binding under the CCAR test or rather would no longer apply into the CCAR test in stress. And so that does give us the opportunity to look across that capital stack in preferreds and sub debt and look at opportunities to take advantage of where we could optimize amongst that. You did note that we did the small preferred issuance this year. That was really a replacement of the -- of a call that we had also done in the first quarter. And so we'll continue to look at that. When we think about the optimizations and our need for those Tier 2 capital, we evaluate those decisions across a variety of factors. We look at the overall market conditions. We look at the broader funding and liquidity and capital needs. And we look at the regulatory considerations. And obviously, right now, we're operating in an environment where we're restricted from either share repurchases and frankly redeeming the Tier 2 capital instruments as well. So that's certainly a factor in how we're thinking about things at this point.

And just to follow-up quickly, would you look at, in the preferred space, the $25 par space as you've done more in the retail space to satisfy that investor demand?

We definitely look at both. And obviously, there are a number of factors that we consider. We try to look at those both to meet investor demand and make sure that all investors are getting what they need. But we also look at the economics of it. And obviously, the economics on an all-in basis across the retail and the institutional can be slightly different. But we will consider both of that -- both of those options when looking at the market.

Your next question is from the line of Scott Cavanagh with APG.

Thanks for holding the call and for the ongoing efforts to enhance disclosures. We definitely appreciate it there. I had to want to talk about 2 topics here. You recently settled 1MDB. Given the significant size and particularly in comparison to the actual issuance size before the deal and the reach to existing and former leadership, could you walk us through the process of the 1MDB settlement and the implication from the risk and compliance framework going forward in your -- in the business strategy?

Sure, Scott, it's Brian. Let me comment on that. As you sort of highlighted, it's been a long process. So we're certainly happy to have reached an agreement with the Department of Justice and other regulators. And we look forward as an institution to putting this behind us. Now however, we recognize to put it behind us, we have to make sure we have the right processes and controls in place to make sure that our culture is clear on the values that we want to stand for. And I think the best way to really drive home how to think about the actions that we're taking and then eventually what that means from a cost perspective is to look at the document that we released when we reached the agreement with the Department of Justice. So in case you haven't seen that, I would recommend that you look at it, it's very detailed. And it goes through a series of actions that we've already taken since these transactions were executed 8 years ago as well as the steps that we're still going to take. So it's -- I think it's been a very helpful way to disclose where we're at and what we've achieved and what's next to do. It certainly includes things like having formulated a firm-wide reputational risk committee. Something that also, I think, drives home how much progress we've made is to think about the size of our compliance department. And since we've executed these transactions, we've more than -- or almost doubled the size of our compliance department over that time frame. And so as a result of the things that we've already been investing in and then looking at the actions we have remaining, we're not expecting there to be a material impact from a cost perspective with regard to completing that program. And that program will be overseen by our Board of Directors.

And then on issuance, you've had a number of peers that have issued social and green bonds. Could you give us your updated thoughts on how your thoughts internally have evolved on potential issuance? And could you give us a timeline of when you might be thinking of tapping the market?

Of course, Scott. As you know, we are very focused on the sustainability space. And we've made a broad commitment from the firm to cover $750 billion of sustainability funding over a 10-year period. And again, that's more than just green bonds to us and looking at those broader themes as we articulated at Investor Day around the 9 different areas. Again, we are focused on this market. We have been watching it closely. We recognize that a number of peers did come to market in the third and fourth quarter in the sustainability space. We've been very involved in supporting the issuance of green bonds for our investment banking franchise. And we've been helping issuers innovate with new structures and best-in-class approaches. And we -- this is a space that we want to get into for ourselves as well. But when we do it, we want to do it in a best-in-class way. And we want to make sure that when we're looking at the assets we're funding, new versus existing assets, the certification process, the ongoing monitoring and reporting, that it's fully aligned with our strategic framework and that it's going to be in a way that we can approach it from a programmatic basis. And so this is something that's very top of mind for us and something that we are looking to move forward with in the near future.

Can I sneak in one more? When we think about the LIBOR transition -- and I know basically the goal line has been punted out to 2023. But when we look at your legacy language for securities, not only recent but before even the demise of LIBOR was envisioned, you have [ been seeing ] that full control of the benchmark. How are you thinking about that absent a legislative fix for what benchmark rate would be appropriate? And what is the appropriate credit adjustment? So are you thinking about 5-year look-back? Are you looking back to the financial crisis to give credit for the potential fluctuations in credit?

It's a great question. We obviously have been spending a lot of time with the ARC and other global regulators and industry bodies to understand what this transition is going to mean and how it's going to move. And as we talked about, most of our exposure is in the derivative space. And in that space, the transition is really continuing apace. And we're deep in the protocol for the transition language with ISDA. And that seems to be going smoothly. And so we are hopeful that, that will continue to move with all due haste, notwithstanding Monday's announcement that we're going to have a paneled LIBOR until 2023. That extension to middle of 2023 does add about $12 billion of our benchmark debt that will mature in that 18-month window. And so that we view as being a positive and that more of that will get cleaned up. When we look at the transition, we are looking at the industry standards, looking at the derivatives market and expecting that there will likely be a mirror into the securities market for those same. And so that the trigger happens, whenever it happens, in the derivatives market with that 5-year median look-back, that's what we're expecting, most likely would be used on the benchmark debt. But again, we're going to stay current with what market thinking is and how the peer set and others are looking at it.

Your next question is from the line of Peter Simon with CreditSights.

I just wanted to ask about your thoughts on the pace of issuance. Obviously, since you've been building up the deposit book, you've been issuing less than maturities in the past few years, moderately below in 2018 and this year and significantly below in 2019. I was just wondering in the context of your expectations on deposit flows for 2021, what you would expect that relationship to look like in terms of the pace of issuance versus scheduled maturities.

Thanks, Peter. I would think that going forward, we're going to continue to have this phenomenon where we have our maturities outpace issuance. So as we talked about, deposit growth continues to be strong. Given the overall macro environment, we would expect it to still be strong next year. But as we mentioned in the prepared remarks, given our entity funding requirements, there's a limit to how much we can fund our businesses with the deposits. And so we do still have needs in the unsecured debt markets. I do think looking at '18 and '20 is a more reasonable expectation than looking at what we had done in 2019 from an issuance perspective. I know you all would love me to give you a number, which I'm not going to do. But I think if you put that in your frame that we're going to be a little bit below the expected maturities, that's probably a good guide.

Our next question is from the line of Arnold Kakuda with Bloomberg Intelligence Research.

Appreciate it, really helpful. In terms of your capital ratio and requirement, it seems like it's on the upswing in terms of the G-SIB going to 3% and then the SCB was higher than, I guess, all of us expected. So can you remind us what are some of the levers that you can pull before we hit the mid-term in terms of being able to reduce the capital requirement of the SCB? And then in addition, what are some of the levers that you have? If, let's say, the requirement doesn't come down, what can you do to increase your capital ratio in the short term?

Thanks, Arnold. That is something that we're spending a lot of time thinking about. And as you noted, we were surprised by the 6.6% SCB requirement that we got at the summertime. Obviously, that was the highest that we've received. Over the period, our average has been much closer to a 6% number. And so when we laid out that target at Investor Day in the 13% to 13.5% expectation, that was based on an SCB lower than a 6.6% number, which is what we are expecting to see. But it's not all reliant on just what happens in the test. There's a lot of self-help here, as you talked about. And the primary focus in that self-help is really around our asset management and our private equity positions. And one of the reasons why we think the SCB this year was so much higher than in prior years was the test in private equity and the impact that they ran in that test in terms of market shocks on our private equity positions. And so as we've talked about at Investor Day and as Brian noted in his remarks, we are continuing to divest and to make sales in those positions. And that's something we're going to continue to do. With that, we do expect that we will be able to reach that 13% to 13.5% CET1 target ratio for us. That's what we think is appropriate for our business based on our risk environment. And I'd note that we'll continue to be dynamic. So to the extent that we get a number, like a surprise number we got this June, we're going to continue to do what we have always done, which is rebuild our capital through strong earnings and strong core business performance to make sure that we can mitigate and adapt as needed.

Great. And then shifting to deposit growth, very impressive this year in terms of hitting the yearly target of the 50-50 funding mix between deposits and long-term debt. How much -- I guess the industry overall has grown, right, with deposit growth in terms of QE and flight to safety. So if the environment does get better in the next few years, how much do you think this deposit growth is healthy -- I mean, sorry, not healthy, is stable compared to the things that are just parked there during the recession?

It's something we're spending a lot of time thinking about, looking at the particular makeup of these deposits and understanding how much is coming because of the overall market environment and the stress and, as you noted, the flight to safety and how much is driven by some of the more technical factors, like the growth in the Fed's balance sheet, which also has been quite significant. When we look out over the next couple of years, we do think the backdrop for deposit growth will continue to be reasonably positive, given continued growth in the Fed's balance sheet as well as reductions in the TGA treasury deposits at the Fed, which should materialize back into reserves as that gets spent into the economy. And so we think over the next 1 to 2 years of that deposit growth potential, that backdrop is going to be quite favorable. But we're spending a lot of time with the modeling teams to understand the characteristics of these new deposits, how sticky they are. Can we look at them the same way that we've looked at other deposits that we've had over time and to make sure that we have the right asset profile lined up against that liability profile?

Okay. Got it. And then if I could sneak one more in on long-term debt levels. So it seems like it's going to be another year or a few years of negative issuance trends, where your long-term debt issuance might be lower than maturities due to deposit growth. But what is kind of the -- how low can it go? Is it -- are you targeting a certain minimum above TLAC levels? Or how can we start thinking about how low your debt levels can actually go? If you can provide us some sort of framework, that would be great.

So it's a good question. I haven't thought about it in any way that I could articulate at the moment for you. There are a number of constraints that we think about when we think about the maturities. One is you can look at, as we talked about, our entity structure. And right now, about 25% of our assets is in the bank. We do expect that to continue to grow as most of our lending activities, as I noted, are in the bank. And so there'll be more that can be funded with deposits, which will lessen our need for debt. TLAC is certainly one of the metrics that we look at. But we're well north of our TLAC requirements. And so that's not near-term binding. We do think that we have further we can go in terms of reducing the amount of debt outstanding. But again, we're going to continue to be opportunistic and look at the market environment, the investor base and how things are performing when we decide what the right amount is for us in any given year or any given point in time.

[Operator Instructions] Your next question comes from the line of David Jiang with Prudential.

I had a quick question on the presentation, Slide 11, which is the 3 tenets of your funding strategy. Can you just give some more tangible examples of maybe bullet points two and three? We understand gathering more deposits. But can you just give us some examples of how you intend to achieve two and three?

Absolutely. Thanks for the question, David. When I look at number two, enhancing asset liability management, I really think about that as being more precise around matching our assets and liabilities. And so historically, because we've come from this broker-dealer background, we've issued a lot of very long-dated debt, always wanting to have more certainty in the WAM of that debt and knowing that would be there through good times and bad. Now that's not changed. We want to know that our liabilities will always be longer than our assets and we'll have that maturity profile. But as we start adding some length in our liabilities duration from deposits, we can reduce the length in our contractual liabilities. So looking at the WAM of our debt, which had been 7 to 8 years, it's now at 7, that we think one of the key areas would be reducing the length of the liabilities from a duration perspective and lengthening the asset. So again, as we move on the asset side of the balance sheet into more lending, we'll be picking up more length there, so just trying to toggle those 2 things more in sync with one another rather than having what our historical risk profile, which was this, let's call it, 8-year WAM of our debt, against a very high turnover, very high velocity global markets business that we match up against. So that's point two. Point three on the optimizing liquidity pool, we've had a very conservative framework around our GCLA for a long period of time in that we only consider U.S. treasuries, U.S. agency mortgages, U.K. gilts, German bunds, French OATs and JGBs as assets that are eligible for that GCLA. So it's quite a bit more restrictive than the HQLA definition. And that's what most of the peer group looks at when they think about their liquidity pools. We do think over time, as we build up this more stable funding base through deposits and as we have more fee-based and recurring revenues and we begin to broaden that profile of our earnings, that we'll be able to broaden that mix of assets in our liquidity base that we can move into. And we think there is yield enhancement to have there. Again, as we talked about at Investor Day, that's not in our current 3-year plan, now 2-year plan. But we are, as we continue to move that forward, thinking about ways that we can migrate and expand and earn a higher yield on that liquidity pool.

Great. Thanks for the explanation. Just as a follow-up to that, I think there's a slide that shows the number of -- what percentage of assets in the regulated bank entity, which is now 1/4 of the total balance sheet. Can you just remind us what's there that's in the bank versus not in the bank and kind of what potentially could be moved in the bank, other than just kind of new originations? I believe the rate book is in the bank, if I'm not mistaken, [indiscernible] to FX. But if you can just kind of refresh, that would be great.

That's right. So most of what's in our bank is our lending businesses. So whether it is our corporate lending business, our consumer lending business, which is quite small but a place [indiscernible] though all of that lending is really to the primary assets in the bank. As you noted, we do have our interest rate derivatives business in our bank. And we have a portion of our foreign exchange business in the bank. And we're continuing to migrate that FX business. It's a long process, just given a lot of it is individual contracts, it's bilateral contracts with clients that need to get moved in there. But that is a place where we continue to see upside and continued progress in getting more assets into the bank.

And at this time, there appear to be no further questions. Please continue with any closing remarks.

Okay. Since there are no more questions, I'd like to take a moment to thank everyone for joining the call. On behalf of our senior management team, we hope to see many of you in the coming months. If any questions arise in the meantime, please don't hesitate to reach out to Heather and the Investor Relations team. Otherwise, enjoy the rest of your day. Please stay safe, and we look forward to speaking with you again.

Ladies and gentlemen, this does conclude the Goldman Sachs Fixed Income Investor Conference Call. Thank you for your participation. You may now disconnect.